Name: ________________ ______________________________________ ________________________ __ Course Year & Section: Section: ___________________ _____________________ __
Date: ___________ Score: __________
Instruction: Answer the following questions. Strictly
are allowed.
MULTIPLE CHOICE . Encircle the letter of your choice. Show S how your solutions. 1. Which three of the following answers are recognized as objectives of financial accounting? A. To provide timely and accurate information to facilitate budgetary control over revenues and costs B. To measure the likely risks and returns associated with a n enterprise C. To provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions and in making resolved choice among alternative courses of action D. To support informed judgments and decisions by users E. To provide information about the reporting entity's financial performance and financial position that is useful to present and potential investors for assessing the stewardship of the entity's management and for making economic decisions
2. Investigating production variances and adjusting the production process is an example of A. planning. B. controlling. C. decision making. D. all of these. 3. The main purpose of management accounting and reporting is to: A. Plan the activities of an enterprise in the future B. Determine costs of production processes C. Provide information for internal decision making D. Set budgets against which actual costs can be compared E. None of the above is correct 4. Which of these statements is false? A. The matching concept requires that we distinguish between expired and unexpired costs. B. To say that a cost has expired means that the benefits associated with the e xpenditure have been obtained. C. Matching is required for both internal and external reporting. D. Unexpired costs represent future benefits. E. Expired costs represent expenses. 5. Developing a company strategy for responding to anticipated new markets is an example of A. planning. B. controlling. C. decision making. D. all of these are correct.
6. Which of the following statements is true? A. All unexpired costs represent assets. B. All assets represent unexpired costs. C. All expired costs represent expenses. D. d. a and b. E. a and c. 7. In traditional cost systems, selling and administrative costs are treated as Page
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A. product costs. B. inventoriable costs. C. unexpired costs. D. period costs. E. None of these 8. Which of the following is an example of the management activity referred to as planning? A. Developing a strategy for disposing of hazardous waste. B. The decision to eliminate an unprofitable segment of an organization. C. The decision to outsource an organization's payroll processing. D. All of these are correct 9. The standards of ethical conduct for managerial accountants include A. competence, confidentiality, integrity, and credibility. B. competence and performance. C. confidentiality, confidence, integrity, and observance. D. integrity and respect for others. 10. Which of the following would normally occupy a staff position? A. cost accounting manager B. assembly worker C. factory manager D. all of these 11. The term “discretionary costs” refers to those: A. Costs which management decides to incur in the current period to enable the company to achieve objectives other than the filling of orders placed by customers. B. Costs which are likely to respond to the amount of attention devoted to them by a specified manager. C. Costs which are governed mainly by past decisions that established the present levels of operating and organizational capacity and which only change slowly in response to small changes in capacity. D. Amortization of costs which were capitalized in previous p eriods. 12. A fixed cost that would be considered a direct cost is: A. Salary of the sales manager when the cost object is the sale department. B. Salary of the controller when the cost object is a unit of product. C. Fees of the Board of Directors when the cost object is the Production Department. D. The rental cost of the finished goods warehouse when the cost object is the Accounting Department. 13. Regression analysis is better than the high low method of cost estimation because regression analysis: A. Is more mathematical. B. Fits its data into a mathematical equation. C. Uses all the data points, not just two. D. Takes more time to do. 14. The variable portion of the semi-variable cost of electricity for a manufacturing plant is a: Product cost Prime cost Conversion cost A. No No Yes B. Yes Yes No C. Yes Yes Yes D. Yes No Yes Page
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15. Multiple regression analysis involves the use of: Dependent variable (s) Independent variable (s) A. None One B. One One C. One Two or more D. Two or more One 16. If the coefficient of correlation between two variables is -0.95, how might a scatter diagram of these variables appear? A. A least squares line that slopes up to the right. B. A least squares line that slopes down to the right. C. Random points. D. A least squares line that slopes down to the left. 17. Coed Novelties manufactures key chains for college bookstores. During 2 003, the company had the following costs: Direct materials used P 31,000 Direct labor 18,000 Factory rent 12,000 Equipment deprecation – factory 2,000 Equipment depreciation – office 750 Marketing expense 2,500 Administrative expenses 40,000 35,000 units produced were in 2003. What is the product cost per unit? A. approximately P1.24 B. P1.80 C. approximately P3.04 D. P1.40 E. approximately P1.82 18. All of the following statements regarding budgeting is true except A. Budgeting helps managers determine the resources needed to meet their goals and objectives. B. Budgeting is a key ingredient in good decision-making. C. Budgeting is a bookkeeping task D. The focus of budgeting is planning. E. Budgeting is an executive responsibility. 19. Product and service costing information is prepared for A. manufacturing companies with inventory. B. merchandising companies. C. service providers. D. each of the other four answers.. E. manufacturing companies without inventory. 20. Bubblemania has three product lines - A, B, and C. A B Sales P10,000 9,000 Variable costs 4,500 7,000 Contribution Margin 5,500 2,000 Fixed costs 3,500 6,000 Net income 2,000 (4,000)
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C 12,000 6,000 6,000 3,000 3,000
Total 31,000 17,500 13,500 12,500 1,000
Product line B appears unprofitable, and management is considering discontinuing the line. How would the discontinuation of Product line B affect net income? A. increase by P4,000 B. decrease by P4,000 C. increase by P2,000 D. decrease by P2,000 E. increase by P6,000 21. Broihan Corporation has the following purchases budget for the last half of 2002: July August September
P100,000 80,000 110,000
October November December
P 90,000 100,000 94,000
Historically, the company pays one half at the time of purchase and the remainder in the month following purchase. What are the expected cash disbursements in August? A. P 80,000. B. P 90,000. C. P 95,000. D. P100,000 E. P105,000 22. Which of the following statements regarding graphs of fixed an d variable costs is true? A. Variable costs can be represented by a straight line where costs are the same for each data point. B. Fixed costs can be represented b y a straight line starting at the origin and continuing through each data point. C. Fixed costs are zero when production is equal to zero. D. Variable costs are zero when production is equal to zero. E. Fixed and Variable costs are curvilinear form above zero on the “Y” axis. 23. You are given the cost and volume information below: Volume Cost 1 unit P 15 10 units 150 100 units 1500 What type of a cost is given? A. fixed cost B. variable cost C. step cost D. mixed cost E. rent cost. 24. When a project has uneven projected cash inflows over its life, an anal yst may be forced to use _______ to find the project's internal rate of return. A. a time line B. a screening decision C. a post investment audit D. a trial-and-error approach 25. What would happen to a blanket rate if production volumes were increased? Page
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A. B. C. D.
The fixed cost per unit of the product would increase. The unit cost of a product would decrease. The unit cost of a product would increase. The direct cost per unit of a product would decrease.
26. In absorption costing, what are the allocated costs? A. The costs that can be directly associated with a department B. Manufacturing costs, which need to be spread over production departments C. Manufacturing costs, which need to be spread over products or services. D. The costs that can be directly associated with a service department A company manufactures high-quality china plates, which are hand-painted. It has a budgeted overhead of P20,000, taking 150 machine hours and 800 direct labo ur hours. Each plate uses P3 of direct materials, 0.25 labour hours at P10 per hour and 0.2 machine hours. What is the cost of a plate? A. P32.17 B. P30.50 C. P10.50 D. P11.75 27. If investment A has a payback period of three years and investment B has a payback period of four years, then A. A is less profitable than B. B. A is more profitable than B. C. A and B are equally profitable. D. the relative profitability of A and B cannot be determined from the information given. 28. In the absence of shutdown costs, A. Shutdown point is higher than breakeven point B. Shutdown point is equal to the breakeven point C. Shutdown point is lower than breakeven point D. One cannot determine the relationship between shutdown point and breakeven point 29. Contribution margin ÷ profit after interests and preferred dividends = A. Degree of operation leverage B. Degree of financial leverage C. Degree of total leverage D. No meaningful amount 30. The contribution margin ratio always increases when the A. variable costs as a percentage of net sales increase. B. variable costs as a percentage of net sales decrease. C. break-even point increases. D. break-even point decreases.
31. Profit under variable costing fluctuates with A. Sales only B. Production only C. Both sales and production D. Neither sales nor production 32. Which of the following capital budgeting techniques is non-discounted? A. Sophisticated rate of return Page
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B. Simple rate of return C. Net present value D. Benefit-cost ratio
33. Ledbetter Company reported the following results from sales of 5,000 units of Product A for June: Sales Variable costs Fixed costs Operating income
P200,000 (120,000) (60,000) P 20,000
Assume that Ledbetter increases the selling price of Product A b y 10 percent in July. How many units of Product A would have to be sold in July to generate an operating income of P20,000? A. 4,000 B. 4,300 C. 4,545 D. 5,000 34. If a firm uses variable costing, fixed manufacturing overhead will be included A. only on the balance sheet. B. only on the income statement. C. on both the balance sheet and income statement. D. on neither the balance sheet nor income statement. 35. Unabsorbed fixed overhead costs in an absorption costing system are A. fixed manufacturing costs not allocated to units produced. B. variable overhead costs not allocated to units produced. C. excess variable overhead costs. D. costs that cannot be controlled. 36. Consider the equation X = Sales - [(CM/Sales) A. net income B. fixed costs C. contribution margin D. variable costs
(Sales)]. What is X?
37. A firm presently has total sales of P100,000. If its sales rise, its A. net income based on variable costing will go up more than its net income based on absorption costing. B. net income based on absorption costing will go up more than its net income based on variable costing. C. fixed costs will also rise. D. per unit variable costs will rise.
38. Which of these statements are advantages of profit planning? 1. Develops profit-mindedness, encourages cost consciousness and resources utilization throughout the company. 2. Provides vehicle to communicate objectives, gain support for the plan, of what is expected, thereby developing a sense of commitment to achieve established goals. 3. Provides yardstick to evaluate actual performance; encouraging efficiency, increasing output and reducing cost. 4. Provides a sense of direction for the company and enhances coordination of Page
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5.
A. B. C. D.
business activity. Eliminates or takes over the role of administration by providing detailed information that allows executives to operate toward achievement of the organization’s objectives. Statements 3, 4, and 5 only. Statements 1, 3, and 4 only. All five statements. Statements 1, 2, 3, and 4 only.
39. When using one of the discounted cash flow methods to evaluate the desirability of a capital budgeting project, which of the following factors is generall y not important? A. timing of cash flows relating to the project B. amounts of cash flows relating to the project C. impact of the project on income taxes to be paid D. method of financing the project under consideration 40. In a multiple-product firm, the product that has the highest contribution margin ratio will A. generate more profit for each P1 of sales than the other products. B. have the highest contribution margin ratio. C. generate the most profit for each unit sold. D. have the lowest variable costs per unit. 41. Which of the following costs would not be accounted for in a company's recordkeeping system? A. a product cost B. an expired cost C. an unexpired cost D. an opportunity cost 42. All other factors equal, a large number is preferred to a smaller number for all capital project evaluation measures except A. payback period. B. net present value. C. profitability index. D. internal rate of return. 43. Green Company plans to purchase new equipment costing P 140,000 plus freight and installation costs estimated at P 23,000. The purchase of the new equipment will prevent the company from having to incur costs of P 30,000 to repair equipment now in service. Depreciation on the new equipment has been estimated at P 20,000 each year. The income tax rate is 40%. The net investment in the new equipment for capital investment planning is A. P 131,000 B. P 145,000 C. P 153,000 D. P 173,000 44. Pink Construction needs an on-site office for its Forbidden Kingdom Construction project. Pink can rent a house trailer for this purpose at a rate of P 100 per month. As an alternative, Pink can construct an on-site office. Pink estimates that the construction of an on-site office would require materials costing P 1,500 (20 percent of which are salvageable upon dismantling) and labor costing P 1,000. Ignoring interest and income tax effects, Pink will realize a net benefit by constructing its own on-site office of Forbidden Kingdom project only if the length of the project is estimated to be at least: A. 18 months B. 20 months Page
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C. 22 months D. 25 months
45. Assuming P 20,000 net annual cash inflows from a 4-year P 59,120-capital investment project, the break-even rate of return (IRR) for the project is closest to A. 11.1% B. 12.2% C. 13.3% D. 14.4% 46. 10% is the profit margin when sales level last year reached P 100,000. If the operating leverage last year was 4 times, then what would have been the variable costs last year to break-even? ANSWER: P 45,000 47. A firm estimates that it will sell 100,000 units of its sole product in the coming period. It projects the sales price at P40 per unit, the CM ratio at 60 percent, and profit at P500,000. What is the firm budgeting for fixed costs in the coming period? A. P1,600,000 B. P2,400,000 C. P1,100,000 D. P1,900,000 48. Knox Company uses 10,000 units of a part in its production process. The costs to make a part are: direct material, P12; direct labor, P25; variable overhead, P13; and applied fixed overhead, P30. Knox has received a quote of P55 from a potential supplier for this part. If Knox buys the part, 70 percent of the applied fixed overhead would continue. Knox Company would be better off by A. P40,000 to buy the part. B. P150,000 to buy the part. C. P50,000 to manufacture the part. D. P160,000 to manufacture the part. 49. Paulson Company has only 25,000 hours of machine time each month to manufacture its two products. Product X has a contribution margin of P50, and Product Y has a contribution margin of P64. Product X requires 5 hours of machine time, and Product Y requires 8 hours of machine time. If Paulson Compan y wants to dedicate 80 percent of its machine time to the product that will provide the most income, the company will have a total contribution margin of A. P200,000. B. P210,000. C. P240,000. D. P250,000. 50. Edwards Company has the following expected pattern of collections on credit sales: 70 percent collected in the month of sale, 15 percent in the month after the month of sale, and 14 percent in the second month after the month of sale. The remaining 1 percent is never collected. At the end of May, Edwards Company has the following accounts receivable balances: From April sales From May sales
P21,000 48,000
Edwards expected sales for June are P150,000. How much cash will Edwards Company expect to collect in June? Page
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A. B. C. D.
P127,400 P129,000 P148,600 P152,520
51. Doyle Company has 3 divisions: R, S, and T. Division R's income statement shows the following for the year ended December 31: Sales Cost of goods sold Gross profit Selling expenses Administrative expenses Net loss
P1,000,000 (800,000) P 200,000 P100,000 250,000
(350,000) P (150,000)
Cost of goods sold is 75 percent variable and 25 percent fixed. Of the fixed costs, 60 percent are avoidable if the division is closed. All of the selling expenses relate to the division and would be eliminated if Division R were eliminated. Of the administrative expenses, 90 percent are applied from corporate costs. If Division R were eliminated, Doyle’s income would A. decrease by P 75,000. B. increase by P150,000. C. decrease by P155,000. D. decrease by P215,000. 52. On budgeting, all of the following are not valid, except A. Responsibility budget identifies revenue and costs with the individual responsible for their incurrence. B. The best way to establish budget figures is to use last year’s actual cost and activity data as this year’s budget estimates. C. A sales budget and a sales forecast are the same thing. D. The primary purpose of the cash budget is to show the expected cash balance at the end of the budget period. 53. Datasoft Industries is considering the purchase of a P100,00 0 machine that is expected to result in a decrease of P15,000 per year in cash expenses. This machine, which has no residual value, has an estimated useful life of 10 years and will be depreciated on a straight-line basis. For this machine, the accounting rate of return would be A. 10 percent. B. 15 percent. C. 30 percent. D. 35 percent. 54. Thomas Company is currently operating at a loss of P15,000. The sales manager has received a special order for 5,000 units of product, which normally sells for P35 per unit. Costs associated with the product are: direct material, P6; d irect labor, P10; variable overhead, P3; applied fixed overhead, P4; and variable selling expenses, P2. The special order would allow the use of a slightly lower grade of direct material, thereby lowering the price per unit by P1.50 and selling expenses would be decreased by P1. If Thomas wants this special order to increase the total net income for the firm to P10,000, what sales price must be quoted for each of the 5,000 units? A. P23.50 B. P24.50 C. P27.50 D. P34.00
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55. Glamorous Grooming Corporation makes and sells brushes and combs. It can sell all of either product it can make. The following data are pertinent to each respective product:
Units of output per machine hour Selling price per unit Product cost per unit Direct material Direct labor Variable overhead
Brushes 8 P12.00
Combs 20 P4.00
P1.00 2.00 0.50
P1.20 0.10 0.05
Total fixed overhead is P380,000. The company has 40,000 machine hours available for production. What sales mix will maximize profits? A. 320,000 brushes and 0 combs B. 0 brushes and 800,000 combs C. 160,000 brushes and 600,000 combs D. 252,630 brushes and 252,630 combs 56. Budgeted sales for Knox Inc. for the first quarter the year are shown below:
UNITS:
JANUARY 35,000
FEBRUARY 25,000
MARCH 32,000
The company has a policy that requires the ending inventory in each period to be 10 percent of the following period's sales. Assuming that the company follows this policy, what quantity of production should be scheduled for February? A. 24,300 units B. 24,700 units C. 25,000 units D. 25,700 units 57. Houston Footwear Corporation has been asked to submit a bid on supplying 1,000 pairs of military combat boots to the Armed Forces. The company's costs per pair of boots are as follows: Direct material Direct labor Variable overhead Variable selling cost (commission) Fixed overhead (allocated) Fixed selling and administrative cost
P8 6 3 3 2 1
Assuming that there would be no commission on this potential sale, the lowest price the firm can bid is some price greater than A. P14. B. P17. C. P20. D. P23. 58. The capital budgeting committee of the Richmond Steel Corporation is evaluating the possibility of replacing its old pipe-bending machine with a more advanced model. Information on the existing machine and the new model follows: Existing machine P200,000
Original cost Page
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New machine P400,000
Market value now Market value in year 5 Annual cash operating costs Remaining life
80,000 0 40,000 5 yrs.
20,000 10,000 5 yrs.
The major opportunity cost associated with the co ntinued use of the existing machine is A. P400,000 cost of the new machine. B. P30,000 of annual savings in operating costs. C. P20,000 of salvage in 5 years on the new machine. D. lost sales resulting from the inefficient existing machine. 59. An investment project is expected to yield P10,000 in annual revenues, has P2,000 in fixed costs per year, and requires an initial investment o f P5,000. Given a cost of goods sold of 60 percent of sales, what is the payback period in years? A. 1.25 B. 2.00 C. 2.50 D. 5.00 60. In budgeting, which of the following statements is false? A. Budgeting provides a measuring device to which subsequent performances are compared and evaluated. B. Planning and control are the essential features of the budgeting process C. Budget preparation is not the sole responsibility of any one department and is prepared by combining the efforts of many individuals D. Capital expenditures budget shows the availability of idle cash for investment 61. Webber Corporation is considering an investment in a labo r-saving machine. Information on this machine follows: Cost Salvage value in five years Estimated life Annual depreciation Annual reduction in existing costs
P30,000 P0 5 years P6,000 P8,000
What is the internal rate of return on this project (round to the nearest 1/2%)? A. 10.5% B. 13.5% C. 25.0% D. 37.5% 62 and 63 Rhodes Corporation is involved in the evaluation of a new computer-integrated manufacturing system. The system has a projected initial cost of P1,000,000. It has an expected life of six years, with no salvage value, and is expected to generate annual cost savings of P250,000. Based on Rhodes Corporation's analysis, the project has a net present value of P57,625. 62. What discount rate did the company use to compute the net present value? A. 10% B. 11% C. 12% D. 13%
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63. What is the project's profitability index? A. .058 B. .945 C. 1.000 D. 1.058 64. Budgeted sales for the first six months for Porter Corp. are listed below:
UNITS:
JANUARY 6,000
FEBRUARY 7,000
MARCH 8,000
APRIL 7,000
MAY 5,000
JUNE 4,000
Porter Corp. has a policy of maintaining an inv entory of finished goods equal to 40 percent of the next month's budgeted sales. If Porter Corp. plans to produce 6,000 units in June, what are budgeted sales for July? A. 1,000 units B. 3,600 units C. 8,000 units D. 9,000 units 65. For better management acceptance, the flow of data to be used for budgeting should begin with A. Accounting department B. Lower levels of management C. Top management D. Budget committee 66. The Blue Plate Co. is operating at 50% capacity producing 100,000 units of ceramic plates a year. With the economic boom that the country is expected to have in the coming year, the company plans to utilize 75% capacity. Part of the manufacturing process is hand painting which has a variable cost of material at P4.50 and labor at P5.50 per plate. This painting process has variable overhead at P1.00 which is 40% of total variable factory overhead. Total factory overhead is P500 per 100 plates. No increase in fixed factory overhead is expected even with the substantial increase in production. An offer to subcontract the incremental hand-painting job was given at P10.50 per plate but the company will have to lease an equipment at P10,000 annual rental. The plates sell for P50.00 per plate a piece at the contribution margin rate of 45%. Should Blue Plate Company sub-contract? Why? A. No, because the company will lose P135,000. B. Yes, because the company will save P65,000. C. Yes, because the company will earn P15,000 more. D. No, because there is no benefit for the company.
Questions 67 thru 74 are based on the following information. The following information has been gathered by the Budget Director of the Kareton Company, another outfit managed by the Masugid Company. The firm manufactures and sells only one product. The selling price during the coming month is expected to be the prevailing price of P5 per unit. Expected sales during the month is a total of 75,000 units of finished goods. Finished goods expected to be on hand at the end of the month total 50,000 units. Finished goods expected to be on hand at the beginning of he month total 42,000 units. Direct labor cost is P3.00 per hour. One-fourth an hour of direct labor is required to manufacture each unit of finished product.
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Factory overhead is applied to work-in-process on the basis of direct labor hours. Variable factory expenses at the planned level of operations is expected to amount to P33,200; fixed overhead is expected to amount to P99,600. The raw materials expected to be on hand at the beginning of the month total 5,000 gallons. Only one kind of raw material is used to produce the finished goods. One and one-half gallons of raw material are needed to manufacture each unit of finished product. Raw materials are expected to cost P0.18 per gallon during the coming month, its prevailing cost. Raw materials expected to be on hand at the end of the month total 8,000 gallons. Variable administrative and selling expenses is P1.00 per unit. In assisting the company to formulate the budget, you determined the following budget parameters. 67. Budgeted cost of raw materials to be used in production is A. P124,500 B. P14,940 C. P8,910 D. P22,410 68. Budgeted raw materials purchases cost is A. P22,950 B. P22,410 C. P23,760 D. P124,500 69. Budgeted direct labor is A. P20,750 B. P83,000 C. P62,250 D. P33,200 70. Variable overhead cost per direct labor hour is A. P1.60 B. P4.80 C. P1.80 D. P6.40 71. Fixed overhead cost per direct labor hour is A. P1.60 B. P4.80 C. P1.80 D. P6.40
72. Budgeted contribution margin is A. P5.00 B. P1.80 C. P3.40 D. P2.58 73. Budgeted cost of goods sold (full cost) is A. P76,500 B. P96,500 C. P196,500 D. P304,000 Page
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74. Net profit before tax is A. P178,500 B. P103,500 C. P53,000 D. P249,500 75. For a company that does not have resource limitations in what sequence would the budgets be prepared? 1. cash budget 4. production budgets 2. sales budget 5. purchase budgets 3. inventory budgets A. sequence 2, 3, 4, 5 and 1 B. sequence 2, 4, 3, 5 and 1 C. sequence 2, 3, 4,1 and 5 D. sequence 4, 3, 2, 1 and 5 Questions 76 thru 79 are based on the following information. For purposes of preparing the cash projections and other budget estimates for the third quarter of 2016, the following information is presented to you by the management of Virgo Corporation: Second Quarter Sales Data: Pesos Units April P 530,000 10,600 May 550,000 11,000 June 570,000 11,400 Projected sales for the next four months July August September October
Pesos 540,000 550,000 560,000 580,000
Units 10,800 11,000 11,200 11,600
All sales are on charge basis and billed at the end of the month. A 5% discount is given on collections within the 15 days from billing date. Sales collections are generally made as follows: 70% within the month following the billing date with 40% of this being collected within the discount period. 27% on the second month following the billing date. 3% considered uncollectible Merchandise purchases are generally paid as follows: 50% within the month they are incurred. 50% after the month they are incurred Ending inventory in units (cost per unit is P40) is 30% higher than the following month’s sales in units. Operating expenses are on cash basis and are estimated to be 15% of the current month’s sales including monthly depreciation of P10,000. As of June 30, 1988, Accounts Receivable b alance was P630,000 and Merchandise Inventory was P565,000. 76. The budgeted cash collections for the month of July would be A. P547,500 B. P539,520 C. P556,020 D. P391,020 77. The budgeted cash payments of the month of September would be Page
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A. B. C. D.
P518,000 P533,600 P468,800 P459,600
78. The projected net income for September would be A. P122,200 B. P112,000 C. P28,000 D. P38,000 79. The balance of accounts receivable at the end of July, assuming that no uncollectible accounts are written off for July would be (VD) A. P622,500 B. P645,660 C. P613,980 D. P630,480 80. Tyler Company currently sells 1,000 units of product M for P1 each. Variable costs are P0.40 and avoidable fixed costs are P400. A discount store has offered P0.80 per unit for 400 units of product M. The managers believe that if they accept the special order, they will lose some sales at the regular price. Determine the number of units they could lose before the order become unprofitable. A. 267 units. B. 500 units. C. 600 units. D. 750 units Use the following information for questions 81 to 88: A family friend, Mr. Ruben Rustia, availed of the early retirement scheme offered by his employer. He said that he was already tired of the routine of spending 8 full hours in an office doing the same thing for the last 20 years. Mr. Rustia plans to get into the field of entrepreneurship. He would invest part of his retirement pay in a business that would deal with the sale of medical supplies to local clinics and hospitals. When Mr. Rustia learned that you are an accountant, he confessed that he is excited with his planned investment project, but very much afraid because he cannot afford to fail and lose his hard earned retirement pay. You advised that a Feasibility Study be prepared for his planned investment project. The study, you said, would determine the viability of his proposed undertaking. It would cover key areas, such as marketing, production or purchasing, and finance, among others. You emphasized that the financial aspect is the most critical of them all. Mr. Rustia requested you to prepare a feasibility study for his proposed business. You immediately started and gathered the following relevant data: a. Projected sales for the first year of operations is P 288,000, spread evenly during the year. All sales will be on account with average collection period of one month. b. The cost ratio will be 60% of sales. c. At the end of the first year, the acid-test ratio will be 1:1, while the current ratio will be 2:1. d. Once the business is underway, purchases will replace the stock sold each month. The average payment period for accounts payable arising from purchases of merchandise will be two (2) months. e. Mr. Rustia will open an account with the nearest bank and deposit P 260,000 to start the business. f. Various fixed assets will be acquired for cash at a total cost of P 240,000. These fixed assets will be depreciated at the rate of 10% per year using the straight line method.
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g. Operating expenses, other than depreciation, is estimated at P 70,000 per year. There will be no accruals and prepayment at year end. h. Mr. Rustia will make drawings in excess of the a mount necessary to meet the above plans. You feel that the given data are enough for you to prepare the financial aspect of the study. 81. The projected income before tax is: A. 78,800 B. 21,200 C. 45,200 D. 115,200 82. The projected balance of accounts payable at the end of the first year of operations is: A. 14,400 B. 48,000 C. 28,800 D. 24,000 83. The projected balance of accounts receivable at the end of the first year of operations is: A. 14,400 B. 48,000 C. 28,800 D. 24,000 84. As of the end of the first year of operations, the projected total current assets is: A. 57,600 B. 14,400 C. 28,800 D. 24,000 85. What is the projected cash balance at the end of the first year of operations? A. 28,800 B. 20,000 C. 4,800 D. 24,000 86. The projected balance of inventories at the end of the first year of operations is: A. 57,600 B. 28,800 C. 4,800 D. 24,000 87. The projected drawings is: A. 65,200 B. 21,200 C. 41,200 D. 36,400 88. The projected balance sheet as of the end of the first year of operations will show an owners’ equity balance of: A. 216,000 B. 244,800 C. 281,200 D. 223,600 89. The Caravan Company is contemplating to purchase a machine that costs P 800,000. The machine is expected to last for 5 years with a salvage value of P 50,000 at the end of the Page
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fifth year. If the machine were purchased, before tax annual cash savings on operating expenses will be realized. Caravan will depreciate the machine using straight line depreciation for 5 years with the salvage value considered in the computation. The company has a 12% cost of capital and is subject to 40% tax rate. The present values using 12% are: Annuity of 1 for 5 periods 1, end of 5 periods
3.60478 0.56743
The initial analysis indicated a net present value of P 7,003. You believe the estimated before tax cash savings are fairly determined but you are in doubt of the expected salvage value of the machine. How much is the estimated salvage value required if the investment has to yield an IRR of 12%? A. 41,800 B. 25,100 C. 24,900 D. 44,600 90. The consulting firm of Magalang Corporation is considering the replacement of their computer system. Taking into account the income tax effect and considering the carrying value of the old system (CVOS) and the salvage value of the new system (SVNS), which combination below applies to the decision making process? A. CVOS, irrelevant and SVNS, irrelevant. B. CVOS, relevant and SVNS, irrelevant C. CVOS, irrelevant and SVNS, relevant. D. CVOS, relevant and SVNS, relevant. Use the following information for questions 91 to 96: The following data pertain to a five-year project being considered by Allan Corporation: (1) A new equipment costing P 1.8 million will be acquired on January 01, 200A. It will be depreciated using the straight line method over a five-year period, with a salvage value of P 200,000 at the end of 5 years. (2) The new equipment will replace an old one that has been fully depreciated to its salvage value of P 220,000. Another company has offered to buy this old equipment for P 250,000 on the replacement date. (3) The project is expected to generate incremental sales of 50,000 units per year. The contribution margin per unit is P 10. Incremental project fixed costs, excluding depreciation is P 130,000. (4) The project requires additional investment in working capital of P 70,000. This amount is fully recoverable at the end of the 5th year.
Allan is subject to an income tax rate of 32%. Its cost of capital (hurdle rate) is 10%. The present value factors at 10% are as follows: Period Present value of P 1 PV of an annuity of P 1 1 0.909 0.909 2 0.826 1.736 3 0.751 2.487 4 0.683 3.170 5 0.621 3.791 Page
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91. The net cost of investment in the new equipment is: A. 1,800,000 B. 1,559,600 C. 1,629,600 D. 1,620,000 92. The expected incremental sales will provide a discounted, net of tax contribution margin over five years of: A. 1,288,940 B. 1,895,500 C. 189,550 D. 953,816 93. The overall discounted cash flow impact of the working investment on Alex’s project is: A. (70,000) B. 43,470 C. 0 D. (26,530) 94. The new equipment is expected to generate annual cash inflows, net of income taxes, of: A. 34,000 B. 370,000 C. 354,000 D. 366,800 95. The discounted, net of tax amount that relates to the disposal of the new eq uipment at the end of the fifth year is: A. 200,000 B. 124,200 C. 84,456 D. 9,744 96. The new equipment’s net present value is: A. 119,916 B. (287,586) C. (119,916) D. (290,316) 97. The bailout payback method A. Incorporates the time value of money. B. Equals the recovery period from normal operations. C. Eliminates the disposal value from the payback calculation. D. Measures the risk if a project is terminated.
98. If an investment project has a profitability index of 1.15, the A. Project's internal rate of return is 15%. B. Project's cost of capital is greater than its internal rate of return. C. Project's internal rate of return exceeds its net present value. D. Net present value of the project is positive. 99. A depreciation tax shield is A. An after-tax cash outflow. B. A reduction in income taxes. C. The cash provided by recording depreciation. Page
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D. The expense caused by depreciation. 100. When using the net present value method for capital budgeting analysis, the required rate of return is called all of the following except the A. Risk-free rate. B. Cost of capital. C. Discount rate. D. Cutoff rate.
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